Calkin v. Commissioner of Inland Revenue
[1984] 1 NZLR 440(Judgment by: Richardson J.)
Calkin
vCommissioner of Inland Revenue
Judges:
Cooke J.
Richardson J.Somers J
Subject References:
Income tax
Deductions
Misappropriations by agent
Taxpayer had been the victim of a confidence trick and had suffered a nett loss of $89,500
Taxpayer had believed that his money was being used by a person who was acting as his agent to buy and sell various assets for a profit with the agent taking a 10% commission
Agent turned out to be a confidence trickster and the transactions were fictitious
Whether the taxpayer was engaged in a business
Whether there had been an 'undertaking' carried on for pecuniary profit
Whether taxpayer's net loss was deductible for income tax purposes
Whether s 129CF allowed the deduction of a capital loss
Discussion of the distinction between fact and law in tax cases
Legislative References:
Land and Income Tax Act 1954 - ss 2, 111 and 129CF.
Case References:
Inland Revenue (Commissioner of) v Parson - [1968] NZLR 375.
Lowe v Commissioner of Inland Revenue - [1981] 1 NZLR 326
Judgment date: 10 May 1984
Wellington, New Zealand
Judgment by:
Richardson J.
Over a period of nine months in 1976 the appellant, an Auckland company director, paid sums totalling $167,500 to a Mrs Pilmer. He had been led to believe that because of her interests and contacts she was able to buy and promptly and profitably resell property of various kinds for clients accounting to the particular client for the proceeds less her commission. The arrangement between them was that she would apply each sum received from the appellant to a particular purchase. He considered various proposals she presented from time to time and there were five unrelated transactions with which over the period he agreed to proceed. These were described respectively as purchase of sheepskins for export, purchase of speculative real estate in Wellington, purchase of the assets of a tannery, purchase of concrete batching equipment, and a speculative work of art. He paid over the sums required and received various sums described to him as proceeds of sale. Thus according to his records he outlaid $6500 on the sheepskin deal and received $8000; $20,000 on the tannery deal and received $40,000; and $10,000 for the speculative work of art and received $16,000 only one day later. However, he received no documentation of any of the transactions which were to have been entered into by Mrs Pilmer as his agent and there being no evidence before Wallace J that any of them actually took place the Judge felt obliged to proceed on the basis that they were fictitious. The appellant was just one of Mrs Pilmer's victims and she was subsequently convicted on 16 charges of obtaining money by false pretences.
The appellant sought to deduct his net loss of $89,500, relying on the general deduction provision (s 111 of the Land and Income Tax Act 1954) and also on the specific provision relating to losses sustained as a result of misappropriation by an employee or by a person rendering services to the taxpayer (s 129CF of the Act). The Commissioner refused the deductions and subsequently disallowed the appellant's objections to the assessments. Wallace J upheld the assessments. He concluded that, since Mrs Pilmer had stolen the appellant's money without appropriating it to any property, the loss the appellant sustained was simply a capital loss and, further, with particular reference to s 129CF, that the appellant had not commenced business so it could not be said that the loss had been incurred "in the course of business" of the taxpayer within that provision.
Mr Molloy advanced the appeal on the ground that the appellant was carrying on a business at the relevant times; that the losses were not capital losses barred from deduction by s 112(1)(a); and that even if they were capital they were still deductible under s 129CF. The first and crucial question then is whether the appellant was engaged in business, and associated with that is the question whether, if so, the loss was "necessarily incurred in carrying on a business" within s 111(b) and "incurred in the course of the business" within s 129CF(1).
Business is defined in s 2 as including any profession, trade, manufacture or undertaking carried on for pecuniary profit. Although Mr Molloy put some emphasis on the words "an undertaking carried on for pecuniary profit" he accepted, rightly in my view, that it could not be said of each or any of the five proposed transactions that it constituted a separate "undertaking" within that definition. Rather he relied on the pattern of intended dealing initiated in each case by the payment made by the appellant to Mrs Pilmer.
In G v Commissioner of Inland Revenue [1961] NZLR 994, 998 McCarthy J concluded that a study of the statutory definition forces the view that it does not add anything to the common meaning of the word and does not catch anything that would not otherwise be caught. In Harley v Commissioner of Inland Revenue [1971] NZLR 482, 487 North P took the same view and I did so too in Grieve v Commissioner of Inland Revenue [1984] 1 NZLR 101. I went on there to express the view that underlying each of the words in the definition in s 2, and the term "business" itself when used in the context of a taxation statute, is the fundamental notion of the exercise of an activity in an organised and coherent way and one which is directed to an end result. The decision whether or not a taxpayer is in business involves a two-fold inquiry: as to the nature of the activities actually carried on - including the period over which they are engaged in, the scale of operations and the volume of transactions, the commitment of time, money and effort, the pattern of activity and the financial results - and as to the intention of the taxpayer in engaging in those activities.
There is too a distinction between transactions which are preparatory to the commencement of business and those which occur once the business has begun which is well recognised in the authorities, if sometimes difficult of application in particular cases. Thus in the leading case, Birmingham & District Cattle By-Products Co Ltd v Commissioners of Inland Revenue (1919) 12 TC 92, Rowlatt J held that a company had not commenced business during the period in which the works were erected, plant assembled and agreements entered into for the purchase of materials preparatory to commencing manufacturing (and see generally New Zealand Income Tax Law and Practice para 1-851). Clearly it is not sufficient that the taxpayer has made a commitment to engage in business: he must first establish a profit making structure and begin ordinary current business operations.
What is said here is that the appellant believed he was engaging in dealing transactions - a business activity - and the pattern of dealing was to begin in each case and did so with the payment by the appellant to Mrs Pilmer. In my view it is artificial to define the activity in that way. A business cannot exist simply in the mind of the taxpayer. It involves real transactions carried on for pecuniary profit. The proposed business, if it may be called that, consisted in the purchase and sale of property - the business of a property dealer. Mrs Pilmer was his agent but she never engaged in any business transactions on his behalf. To attach substance to non-existent transactions on the ground that the appellant honestly but erroneously believed they were taking place is to substitute fiction for fact. The intended income earning activity never got started because she misappropriated his money. The payments of sums by her to him could not invest a character in his earlier payments to her which they would not otherwise have had. They were simply the actions of a confidence trickster who was stringing her "client" along. And the fact that the appellant in paying the sums over to Mrs Pilmer earmarked them for intended income earning purposes does not in my view advance his case. In the absence of any actual purchases and sales or of any dealing at all with third parties relative to the purchase and sale of property I consider there is no factual basis for a conclusion that the intended business had commenced.
I would dismiss the appeal.